Profit Sharing Plan
A Profit Sharing Plan is a retirement plan in which the contributions are made solely by the employer. The business owner has the flexibility to contribute and deduct between 0% and 25% of eligible participant's compensation up to a maximum each year. Several allocation methods are available:
- Same percentage of compensation for each participant
- Permitted disparity (Social Security Integration)
- Sole proprietorships, partnerships, limited liability corporations (LLCs), or incorporated businesses, including subchapter S corporations, can establish a profit sharing plan.
- All elibible employees must be allowed to participate in the plan. An eligible employee is any employee who has provided service to the employer for up to two years.
- Union employees and non-resident aliens who have no U.S. source of income may generally be excluded from coverage.
- If the elected waiting period is 1 year or longer, the employee must normally work 1,000 hours during the 12-month period beginning on the date of employment and satisfy the plan's service requirement in order to enter the plan.
- If the waiting period is less than 1 year, all employees must be included after satisfying the eligibility requirements regardless of the number of hours worked during the year.
- The employee's minimum age is elective, but cannot exceed age 21. Note: an employer can establish less restrictive eligibility requirements than the ones listed above, but not more restrictive ones.
Vesting is the participant's ownership in the value of his/her retirement account or benefit. The vesting schedule elected by the employer applies to all participants.
- If the service requirement is 1 year or less, a graded vesting schedule may be elected. The most common graded schedule is 0% the first year and 20% per year thereafter.
- If the service requirement is greater than 1 year, vesting must be 100% immediately upon becoming a participant in the plan.
- Employer contributions are tax deductible for the employer - up to the lesser of 25% of the total participant's compensation
- Tax-deferred growth potential is possible - any investment earnings grow tax-deferred until withdrawn
The deadline to establish a profit sharing plan is the last day of the fiscal year of the business. For calendar year businesses, this deadline is December 31st.Contribution Flexibility
No annual contribution is required
Last Updated: 9/23/2012 10:05:00 PM
- Contribution percentage can vary each year, from 0-25% of compensation, up to a dollar maximum per participant each year.
- Individual limits: the allocation of contributions to a participant's account may not exceed the lesser of 100% of includable compensation or $42,000 per year.
- Contribution base: contributions are normally based on total compensation (base salary, bonuses, overtime, etc.) The maximum compensation recognized in 2005 is $210,000.